Today and tomorrow will largely mark the direction in which the Israeli economy will move in the coming months. In focus: the foreign exchange, the publication of the consumer price index for the month of March and the credit rating that will be given to Israel by the most important rating agency of all – Moody’s.

The foreign exchange market was turbulent during the holiday. The euro jumped by about 2% and crossed the NIS 4 mark – the highest level since September 2020. At the same time, the dollar also strengthened against the shekel and during the trading day yesterday it reached a rate of NIS 3.68 but weakened slightly after publication US inflation data. This morning we will find out how the return of the Israeli merchants after the holidays will affect the foreign exchange and the shekel.

What is expected in inflation?

While the world already sees signs of inflation moderation, in Israel this situation is still a long way off. Even the forecast published only recently by the Bank of Israel says that at the end of this year inflation will stand at 3.9% – above the target set by law (1%-3%). Meanwhile, according to market estimates, inflation is expected to decrease in March to an annual rate of 5%, while in February it was a negative surprise and stood at an annual rate of 5.2%. The monthly increase in March is expected to be 0.3% compared to an increase of 0.5% in February.

Last week, Governor Prof. Yaron explained the decision to raise the interest rate in the economy by only a quarter of a percent, to 4.5%, by saying that inflation in Israel is still high. The governor explained that it is expected that starting in 2024 inflation will converge towards the bank’s target.

The critical report for the ranking of Israel

As mentioned, the macro week will end on a high when the credit rating company Moody’s publishes its rating forecast for the State of Israel. The rating currently stands at A1, a very positive rating, but the outlook for the near future was clouded when last month the rating company issued an unusual warning to investors.

In a warning, she reviewed the proposals for changes in the legal system initiated by the Israeli government in recent months, and warned that if they are accepted in full, they will “significantly weaken the power of the legal system in Israel”, and therefore will also “have negative consequences for Israel’s credit rating”.

The agency hinted that it will consider changing the rating horizon (Outlook) if the reform is fully implemented. That is, the score itself will not change, but the rating horizon will decrease. “Only in April 2022 Israel’s rating horizon was defined as ‘positive’, among other things due to the recovery from the Corona crisis and the budgetary discipline,” the analysts write, “but these may not be sufficient to offset the weakening of the institutions if the content and the way in which the legal reforms will be carried out indicate the weakening like that”.

Meanwhile, the reform in its initial form has entered a freeze, so it is difficult to see Moody’s lowering Israel’s credit rating now. The aforementioned rating forecast may already be something else, a kind of “yellow card” towards reducing the rating itself. Taking her down from “positive” to “neutral” seems like a slightly more plausible scenario. Certainly after even the Bank of Israel and senior officials of the Ministry of Finance warned of the serious economic consequences that may be had for promoting extreme and unilateral moves regarding the judicial system.